Socket Mobile(SCKT) - 2019 Q4 - Annual Report

PART I Business Socket Mobile provides cordless barcode scanners and RFID/NFC readers, integrating with mobile applications via its Capture SDK and global distribution - The company's core business is providing data capture solutions like barcode scanners and RFID/NFC readers for mobile applications across various industries[14] - A key strategy involves supporting application developers with the Capture SDK to integrate hardware into their solutions[14][22][31] - The company uses third-party contract manufacturers for components, with final assembly and distribution managed from its Newark, California facility[23][29] - Products are sold globally through a network of major distributors including Ingram Micro®, ScanSource®, and Blue Star, and online resellers[36] The Company and its Products The company offers a range of cordless data capture devices, including barcode scanners and RFID/NFC readers, all supported by the Capture SDK - DuraScan® 700 Series are durable barcode scanners with IP54 rating for harsh environments, capable of reading 1D, 2D, postal codes, and MRZ[16] - SocketScan® 700 Series are standard 1D and 2D barcode scanners available in multiple colors[17] - DuraSled and SocketScan 800 Series are attachable scanners that clip onto smartphones for single-handed scanning solutions[18][19] - Contactless RFID/NFC Readers include the D600 and S550 for tap-and-go applications like ticketing and identification[20] Marketing Dynamics The marketing strategy focuses on software developer relationships, with significant revenue from retail POS barcode scanners and global distribution - The primary marketing focus is on supporting software application developers through the registered developer program and Capture SDK[31] - Revenues in 2018 and 2019 were primarily driven by barcode scanner sales for retail POS applications using Apple tablets[33] - Products are distributed globally through major distributors like Ingram Micro®, ScanSource®, and Blue Star, supporting online resellers[36] Competition and Competitive Risks The company differentiates its hardware via the Capture SDK in a competitive market, facing barcode scanner rivals and alternative solutions, with limited direct RFID/NFC competition - The company's main differentiator is its Software Developer Kit (Capture SDK), offering advanced features and easy integration for developers[39][40] - Direct competitors for cordless barcode scanners include Koamtec, Code Corporation, and Opticon[40] - Alternative solutions include camera-based scanning apps (Scandit, Manatee Works) and rugged integrated devices (Datalogic, Honeywell, Zebra)[40] Proprietary Technology and Intellectual Property The company protects its competitive position through patents, trademarks, copyrights, and trade secrets, including 41 U.S. and 13 design patents - The company holds 41 U.S. patents and 13 design patents[42] - Proprietary assets include the hardware design of its scanners and specialized data collection software compatible with iOS, Android, and Windows[44][45] - Protection methods include patents, copyrights, trademarks, trade secret laws, and confidentiality agreements[46] Risk Factors The company faces various risks including economic downturns, capital needs, dependence on developers and suppliers, rapid product development, competition, and retaining key personnel - Economic and market risks include sensitivity to global economic conditions like the Covid-19 pandemic and Brexit uncertainty for European distribution[48][54] - Financial risks involve potential need for additional capital, maintaining profitability, and compliance with bank credit agreement covenants for liquidity[49][50][58] - Dependency risks include reliance on application developers, a limited number of component suppliers, and a few major distributors like Ingram Micro® and BlueStar (59% of 2019 revenue)[51][61][65] - Product and competition risks involve the need for rapid new product development and potential price reductions or market share loss due to increased competition[62][67] - Personnel risks depend on retaining key senior management and technical personnel[85][87] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[95] Properties Socket Mobile leases a 37,100 sq ft facility in Newark, California, serving as headquarters and manufacturing, with its lease expiring in June 2022 - The company leases a 37,100 sq ft facility in Newark, CA for its headquarters and manufacturing operations[96] - The lease for this facility expires in June 2022[96] Legal Proceedings As of the filing date, the company is not a party to any material legal proceedings - The company is not currently a party to any material legal proceedings[97] Mine Safety Disclosures This item is not applicable to the company - Not applicable[98] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under SCKT, with no dividends paid or anticipated, as earnings are retained for business use - The company's common stock is traded on NASDAQ under the symbol SCKT[101] - The company has not paid dividends and does not plan to in the foreseeable future[101] Selected Financial Data This section provides a five-year summary of key financial data from 2015 to 2019, highlighting trends in revenues, profitability, and balance sheet items Five-Year Selected Financial Data (Years Ended December 31, in thousands) | Indicator | 2015 | 2016 | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues | $18,400 | $20,788 | $21,286 | $16,454 | $19,253 | | Gross Profit | $8,935 | $10,434 | $11,390 | $8,456 | $10,101 | | Net Income (Loss) | $1,817 | $12,147 | $(1,431) | $(571) | $287 | | Diluted EPS | $0.30 | $1.80 | $(0.23) | $(0.09) | $0.05 | | Total Assets | $9,688 | $21,587 | $19,854 | $18,597 | $19,458 | | Total Stockholders' Equity | $3,343 | $16,170 | $17,230 | $12,405 | $13,234 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2019, the company returned to profitable growth with 17% revenue increase to $19.3 million, driven by SocketScan, managing liquidity via operations and credit lines - The company returned to profitable growth in 2019 after a net loss in 2018, with revenue growing 17% to $19.3 million and net income before tax of $0.5 million[107] - Liquidity is maintained through operating cash flow and bank credit lines, with $1.0 million cash as of Dec 31, 2019, including $1.4 million advanced on bank lines[107] Results of Operations Revenue increased 17% to $19.3 million in 2019, driven by SocketScan growth, with gross margin improving and operating income turning positive from a prior year loss Revenue by Product Line (2019) | Product Line | % of 2019 Revenue | YoY Growth vs 2018 | | :--- | :--- | :--- | | SocketScan | 58% | 22% | | DuraScan | 19% | 1% | | DuraSled & Attachable | 12% | 5% | Key Operating Metrics (2018 vs 2019, in millions) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenue | $19.3M | $16.5M | +17% | | Gross Margin | 52.5% | 51.4% | +1.1 p.p. | | R&D Expense | $3.9M | $3.6M | +7% | | S&M Expense | $3.0M | $3.0M | 0% | | G&A Expense | $2.6M | $2.4M | +7% | | Operating Income (Loss) | $0.6M | ($0.6M) | +$1.2M | Quarterly Results of Operations Quarterly results show improving performance in 2019, moving from losses in 2018 to consistent net income, with revenue peaking in Q2 2019 and influenced by order timing Quarterly Net Income (Loss) (in thousands) | Quarter | 2018 | 2019 | | :--- | :--- | :--- | | Q1 | $(225) | $12 | | Q2 | $(138) | $120 | | Q3 | $(45) | $94 | | Q4 | $(163) | $61 | - Quarterly results can fluctuate significantly due to the timing of orders, with substantial revenue often recognized in the last month of the quarter[137] Cash Flows and Contractual Obligations In 2019, net cash from operations was $0.87 million, with investing and financing activities using cash, and total contractual obligations at year-end reaching $4.79 million Cash Flow Summary (in millions) | Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net Cash from Operations | $0.87 | $0.75 | | Net Cash used in Investing | ($0.60) | ($0.42) | | Net Cash used in Financing | ($0.40) | ($2.62) | Contractual Obligations at Dec 31, 2019 (in thousands) | Obligation Type | Total | Due in 1 Year | | :--- | :--- | :--- | | Unconditional purchase obligations | $3,554 | $3,554 | | Operating leases | $1,230 | $479 | | Financing leases | $8 | $8 | | Total | $4,792 | $4,041 | Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from interest rate fluctuations on variable-rate loans and foreign currency exchange rates from Euro and British pound sales, partially mitigated by hedging - Interest rate risk stems from variable-rate bank term loans and credit lines; a 1% increase would have raised Q4 2019 borrowing costs by approximately $3,000[146] - Foreign currency risk arises from sales to European distributors denominated in Euros and British pounds, with a significant portion of Euro-denominated receivables hedged[147] Financial Statements and Supplementary Data This section presents the company's audited financial statements for 2019 and 2018, including Balance Sheets, Statements of Operations, Stockholders' Equity, Cash Flows, and accompanying Notes Financial Statements The audited financial statements show $19.5 million in total assets, $19.3 million revenue, and $287 thousand net income for 2019, reflecting a recovery from 2018 losses Balance Sheet Highlights (as of Dec 31, 2019, in thousands) | Account | Amount | | :--- | :--- | | Total Current Assets | $7,521 | | Total Assets | $19,458 | | Total Current Liabilities | $5,468 | | Total Liabilities | $6,224 | | Total Stockholders' Equity | $13,234 | Statement of Operations Highlights (Year ended Dec 31, 2019, in thousands) | Account | Amount | | :--- | :--- | | Revenues | $19,253 | | Gross Profit | $10,101 | | Operating Income | $606 | | Net Income | $287 | | Diluted EPS | $0.05 | Notes to Financial Statements The notes detail accounting policies, including revenue recognition, bank financing, lease obligations, stock-based compensation, and income taxes, with $20.6 million in federal net operating loss carryforwards - Revenue recognition (ASC 606) on sales to distributors is upon shipment, net of returns, with deferred revenue of $611,000 at year-end 2019[188] - Bank financing includes a revolving line of credit and term loan with Western Alliance Bank, amended multiple times due to covenant issues, with the revolving line extended to January 2022[216][220][227] - As of Dec 31, 2019, the company had federal net operating loss (NOL) carryforwards of approximately $20.6 million, expiring starting in 2023[259] - Stock-based compensation under the 2004 Equity Incentive Plan totaled $519,891 in 2019 for stock options and restricted stock grants[240][242] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure This item is not applicable, indicating no changes in or disagreements with the company's accountants - Not Applicable[265] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with no material changes reported - Management concluded that disclosure controls and procedures were effective as of the end of the period[266] - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2019[269][270] Other Information The company reports no other information under this item - None[273] PART III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on May 27, 2020 - Information is incorporated by reference from the Registrant's Proxy Statement[276] Executive Compensation Information for this item is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on May 27, 2020 - Information is incorporated by reference from the Registrant's Proxy Statement[277] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on the company's equity compensation plans as of December 31, 2019, with other details incorporated by reference from the Proxy Statement Equity Compensation Plan Information (as of Dec 31, 2019) | Plan Category | Securities to be issued upon exercise of outstanding options | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 2,392,786 | $2.40 | 308,871 | Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on May 27, 2020 - Information is incorporated by reference from the Registrant's Proxy Statement[281] Principal Accounting Fees and Services Information for this item is incorporated by reference from the company's Proxy Statement for the Annual Meeting of Stockholders on May 27, 2020 - Information is incorporated by reference from the Registrant's Proxy Statement[282] PART IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K report, including an index to financial statements and exhibits, noting the omission of inapplicable schedules - This section contains the index to financial statements and an index to all exhibits filed with the report[285][286]